Taxpayers Will Help The Banks Pay In Mortgage Settlement

A number of consumer advocates are complaining that U.S. mortgage lenders are getting off too light in the settlement to resolve charges that they wrongfully foreclosed on many homeowners. It now appears the settlements are even better for the lenders than first appeared. Taxpayers will actually subsidize the banks for the money they are paying out. The Internal Revenue Service regards the lenders’ compensation to homeowners as a cost incurred in the course of doing business. This results in the amounts being fully tax-deductible.

Critics argue that big banks that were bailed out by taxpayers during the financial crisis are again being favored over the victims of their mortgage abuses. The 12 mortgage lenders that settled with hundreds of thousands of folks whose homes were seized improperly, a result of abuses such as “robo-signing,” are discussed above.

Many consumer advocates argued that regulators settled for too low a price by letting banks avoid full responsibility for the wrongful foreclosures that victimized families. The price the banks will actually pay will be further eased by the tax-deductibility of their settlement costs. Companies can deduct those costs against federal taxes as long as they are compensating private individuals to remedy a wrong. By contrast, a fine or other financial penalty is not tax-deductible.

Taxpayers “should not be subsidizing or in any way paying for these corporations’ wrongdoing,” according to Phineas Baxandall, a senior tax and budget analyst at the U.S. Public Interest Research Group, a consumer advocate. In some rare cases, federal regulators that have reached financial settlements with companies have barred them from writing off any costs against their taxes, even if they might be legally entitled to do so.

When companies negotiate financial settlements, they surely consider whether they can deduct some of their costs incurred. At least one lawmaker, Sen. Sherrod Brown, D-Ohio, wants regulators to stop the tax deductibility of the lenders’ costs. Sen. Brown made his argument in a letter to Federal Reserve Chairman Ben Bernanke, U.S. Comptroller of the Currency Thomas Curry, and other top regulators. It should be noted that the Fed and the Comptroller’s office, a Treasury Department agency, negotiated the foreclosure abuse settlements with the banks that we wrote about above. Sen. Brown wrote in his letter that “[i]t is simply unfair for taxpayers to foot the bill for Wall Street’s wrongdoing. Breaking the law should not be a business expense.”

I totally agree with Sen. Brown. If you agree with him, write and let him know. You should also write the Congressional delegate in your state and ask them to support legislation that would stop wrongdoers in the corporate world from shifting the costs of their settlements to taxpayers.